The Next Generation RTGS: Liquidity Saving Mechanisms as an Overlay Service
FNA Papers Series
By Florian Loecker, Amanah Ramadiah, Dr Kimmo Soramaki & Will Towning
Historically, central banks transitioned to Real-time Gross Settlement (RTGS) systems to eliminate the systemic risks inherent in Deferred Net Settlement. However, the individual settlement of payments demands significant liquidity, prompting the integration of Liquidity-Saving Mechanisms (LSMs) directly into core RTGS infrastructures. As these legacy systems approach the end of their life cycles, their commingled processing and ledger functions present barriers to agile modernization and create unnecessary systemic complexity.
To address this, this paper proposes decoupling these functions through an "LSM Overlay Service". By establishing an intermediate pre-processing layer, financial institutions can submit payments to the overlay, which algorithmically queues, synchronizes, and resequences them before submission to a simplified, "thin" RTGS ledger. This modular architecture provides substantial benefits: it reduces systemic and operational risks by settling payments earlier, bypasses sluggish core-system procurement cycles for faster technology updates, and aligns market incentives by allowing financial institutions to manage the liquidity solutions they benefit from. Ultimately, utilizing advanced resequencing within this overlay can save an average of 69% of liquidity, achieving near net-settlement efficiency without the associated legal complexities.
